Wholesaling is a business activity which entails buying of goods in bulk from the producer and selling in small quantities to the retailers and other merchants. A wholesaler is a merchant who purchases goods in large quantity from the manufacturer and sell in small quantities to the retailers. Wholesaling activities are essential in the channel of distribution.
Functions which the Wholesaler Performs to the Manufacturer
- Bulk breaking: The wholesaler purchases goods in bulk or large quantity from the manufacturer and sells in small quantities to the retailers.
- Financing: They finance production by ensuring prompt payment to the manufacturer and this will facilitate production processes.
- Information dissemination: They provide the necessary information to the manufacturer regarding the retailers’ and consumers’ views about the products. The views may concern changes in taste, fashion and defects.
- Warehousing: The wholesaler provides warehousing facilities to get rid of stockpiling at the production point. Goods are stored here until they are bought, hence it spurs the manufacturers to keep on producing.
- Advertising: The wholesaler helps in carrying out product advertising and sales promotions and by so doing creates awareness for the products.
- Price stability: They help to prevent price fluctuation by stocking the goods until they are demanded.
- Provision of transport: The wholesalers often provide transport needed in distribution. They send their vehicles to collect the goods from the manufacturers.
- Credit facilities: The wholesaler can give credit facilities to the manufacturer, sometimes by paying upfront for the products.
- Risk bearing: The wholesaler takes charge of the goods, thereby accepting responsibility for losses suffered in the course of distribution.
- Branding and packaging of goods: The wholesalers brand and package goods received from the producers before selling to the retailers.
- Giving advice to manufacturers: They can advise the manufacturers on the market situations, e.g. on the brand of goods needed by consumers.
- Market research: The wholesaler carries out market research to provide a two-way flow of information relating to market situations between the manufacturer and potential buyers. This assists in the marketing of current products and development of new ones.
Functions which the Wholesaler Performs to the Retailer
- Provision of variety of goods: The wholesaler enables the retailers to stock variety of goods, which they purchase from different manufacturers.
- Provides credit facilities: They allow retailers to buy on credit and pay for the goods later. This enables retailers to run their business with a small capital.
- To advise the retailer: He can advise the retailer as a result of his expert knowledge of the goods. He can inform him about new developments in the market.
- Makes goods available in small quantity: Wholesaler carries large stock of goods and divides it into small quantities in order to sell to the retailers.
- Transportation services: The wholesaler can help to transport or convey goods to the retailer’s shop.
- Grading and packaging of goods: He puts finishing touches to production by grading, branding or repackaging of products before selling to the retailers.
- Price stability: The manufacturer carries out this duty for the retailer by storing the goods in his warehouse and releases them according to the demand of the retailer.
- Advertising of goods: By embarking on advertising or sales promotion, the wholesaler can help in creating awareness for the products on behalf of the retailers.
- Risk bearing: The wholesaler bears the risk of fall in prices on behalf of the retailer by buying and storing of products in large quantity.
- Links the retailer and the producer: He provides a link between the producer and the retailers as information concerning the products flow from the producer through him to the retailer.
CHANNELS OF DISTRIBUTION
The channel is a path through which goods move from the producer to the consumers. It is the path through which the ownership of products is transferred as it moves from the producer to customers.
The middlemen are the wholesalers and retailers who specialise in performing activities relating to the purchase and sale of goods in the process of their flow from producer to final buyers. They are institutions situated in the marketing channel at points between the producer and final buyers.
Factors for Consideration before Choosing a Particular Channel
- Number of Potential Buyers: The number of potential buyers will be taken into consideration before deciding which channel to choose. When the number is small, a shorter channel is chosen, while longer channel is chosen when they are many.
- Competitors’ Channel: The channel used by competitors of the firm must be analysed before choosing one.
- Resources of the Producer: A rich producer will open his own retail outlet while an average producer will prefer a longer channel.
- Nature of the Goods: The nature of the goods will determine which channel to choose. Perishable goods, specialised and expensive goods require shorter channels.
- Size of Order: If the order is large, the producer can bypass the middlemen and use shorter channel and vice versa.
- Location of Customers: The producer will use shorter channel where potential customers are concentrating in an area while longer channel will be good for potential customers that are scattered all over the country.
ELIMINATION AND SURVIVAL OF MIDDLEMEN
Survival: The middlemen have continued to wax stronger in spite of all the strong arguments for their elimination. The middlemen should not be eliminated because the functions they perform to both the producers and ultimately to customers cannot be performed by any of them, i.e ., the manufacturer or customers.
Having gone through the various contributions of the middlemen to distribution, there is no iota of doubt that they should be allowed to continue to flourish.
Elimination: Another school of thought supports the total elimination of the middlemen. This school supports its argument with facts like: The middlemen have contributed to increase in prices and hoarding of goods, therefore producers should deal directly with the customers.
Circumstances (Reasons) that may Warrant the Elimination of Middlemen
The factors that encourage the elimination of middlemen from the channel of distribution are:
- Manufacturers with good transport and communication facilities will prefer to deliver the goods themselves.
- Improved credit facilities from banks and other financial houses have rendered the role of middlemen in financing the manufacturer less important.
- Fragile and technical goods that require special handling need no middlemen as manufacturers prefer to deal directly with the consumers.
- Goods of high unit value do not need to be entrusted to middlemen.
- The need by manufacturers to control the market for their goods and prevent hoarding since middlemen carry competing brands, makes the manufacturers deal directly with the consumers and thus eliminate middlemen.
- Some manufacturers now choose to spend more on advertising to create awareness and hence demand for their products, instead of using the middlemen.
- Manufacturers may eliminate the middlemen because of the need to obtain immediate feedback from the consumers.
- Manufacturers may eliminate middlemen to avoid adulteration of goods.
- Where there is a high demand for a product, the manufacturer may choose to eliminate middlemen in order to meet the demand promptly and adequately.
TYPES OF WHOLESALERS
Wholesalers can be classified into two broad categories, namely: Merchant wholesalers and Agents middlemen.
The merchant wholesaler buys and re-sells goods on their own account taking title to the products they handle and convey the title directly to those they deal with. They derive profit from the marginal difference between the purchase and selling price. Majority of wholesalers fall into this category.
Functions of Merchant Wholesalers
- They arrange credit terms.
- They undertake the storage of goods.
- They provide promotional services.
- They provide delivery services.
- They also provide advisory services.
Types of Merchant Wholesalers
- Specialist Wholesalers: These are wholesalers who restrict their services to a particular trade and area in which they have specialised knowledge. The products they handle require special skill and handling.
- Rack Jobbers: Rack jobbers sell specialised line of merchandise to retail stores and provide certain special services. Rack jobbers servicing supermarkets usually specialise in one or both of two lines toiletries and housewares. The managers of stores served by them are relieved of the merchandising problems involved in handling sundry items and concentrate efforts on other major lines.
- Cash and Carry Wholesalers: These are at present mainly concerned with grocery products. They do not offer credit nor delivery services to the customer. They normally operate on lower margins. The cash and carry wholesalers require retailers to pick their orders, pay cash and carry away their purchase.
- Truck Wholesalers: A truck wholesaler combines selling, delivery and collection in one operation. He carries only a limited range of stock although the selection within that range may be rather completed. They handle perishable goods. Their ability to make fast and frequent delivery is the main appeal to customers and manufacturers. Examples of goods handled are fish, tomatoes, etc.
- Drop Shipment: Drop shipments handle the good physically but leave the performance of storage and transportation to the producer whom it represents. The manufacturer ships them directly to the retailer but bills the drop shipper at factory prices. Goods in industrial manufacturing, such as coal are handled by drop shipment.
- General Wholesalers: General wholesalers are wholesalers who purchase goods from different producers, store the goods and prepare them for sale to the retailer in small quantities.
- Wholesale Co-operative Societies: Wholesale cooperative societies are formed by retail stores who purchase goods in bulk or large quantity from the producers at a reasonable price and sell in units to retail co-operatives. When they come together as an entity, they have better bargaining power to purchase goods in bulk from the producers.
Agent middlemen are mostly engaged in wholesaling rather than in retailing. They assist in negotiating sales and purchases or both on behalf of their principals. They do not take title to the goods but they receive commission. Agent middlemen are brokers, manufacturer’s agents, auctioneers, commission merchants, selling agents etc.
1) Brokers: Brokers are agents that link or connect sellers with the buyers. They take neither title nor possession of goods. A broker receives commission called brokerage. They usually specialise in narrow range of products. He represents either the buyer or seller in negotiating purchases or sales without having physical control over the goods involved.
2) Manufacturer’s Agents: Manufacturer’s agents are appointed by the producer to market its product in a particular area. The manufacturer will pay them commission. They are usually engaged in industrial and durable goods.
Features of Manufacturer’s Agent
- The agent has extended contractual relationship with the principal.
- He handles sales of products within a limited territory.
- He can represent manufacturers of noncompeting but related line of goods.
- The agent possesses limited authority with regard to the term of sales and price.
- He is rarely involved in credit collection and risk.
3) Auctioneer: Auctioneers are agents who offer goods to prospective buyers through public auction. They sell goods to the highest bidder. Auctioneers deal in unique goods, e.g. art work, houses etc.
4) Commission Agent: A commission agent is an agent merchant who buys and sells goods on commission basis on behalf of his principal. He usually exercises physical control and negotiates the terms of sale of goods handled by him.
5) Factor: A factor does not buy goods nor do they take title but they do take possession and provide warehouse and handling facilities. He also receives commission.
6) Del-credere Agent: Del-credere is an agent who undertakes or guarantees to indemnify the principal against any loss arising from buyer’s default in payment. He is paid extra commission called del-credere commission.
Warehousing is the act of storing goods produced or bought in a place until they are needed. Warehousing ensures that there is a regular and steady supply of goods. The producer or wholesaler must hold stock until the consumers demand for it. In other words, warehouse is a place where goods are stored until they are demanded by the consumers.
Importance of Warehousing
- Stability of Price: Warehouse ensures that there is no fluctuation in prices of goods. It helps to stabilise prices of goods.
- Seasonal Problem is Eliminated: Since goods are stored until they are needed, some seasonal problems pertaining to production or sales are eliminated.
- Storage Facilities: Warehouses serve as storage facilities; they are provided for keeping the goods safely.
- Ensures Production of Goods Ahead of Demand: Warehouse facilities ensure that goods are produced ahead of demand.
- Provides Security for Goods: It ensures effective check and adequate security for the products.
- Facilitates Repackaging: In the warehouse, repackaging and branding of goods are facilitated.
- Employment Opportunities: Warehousing creates job opportunities for many people, e.g. clerks, managers etc.
- Ensures Constant Supply: Constant and steady supply of goods throughout the year is made possible through warehousing.
Types of Warehouses
There are five types of warehouses, namely:
1) Bonded Warehouse: Bonded warehouse is a place where goods whose custom duties have not been paid are stored until the duties are settled. Bonded warehouse is usually located at the port for storing goods until the duties are paid.
The first bonded warehouse was introduced by Wolpole in 1724 for tea. The owners of bonded warehouses guarantee that the goods will be released when duties have been paid and the authority concerned issue out warehouse warrant for it. A warrant is a document which entitles its holder to the goods named on it, which is stored in a specific warehouse.
Usefulness of Bonded Warehouse in International Trade
- Bonded warehouse provides security for goods imported from other countries whose duties have not been paid.
- The importer will be allowed adequate time to pay the charged custom duties.
- It facilitates foreign trade.
- Customs authority will have the opportunity to calculate the actual value of import duties.
- Goods in a bonded warehouse can be easily sold by the importer.
- Production processes like branding, packaging can be done while the goods are still in the warehouse.
2) State Warehouse: State warehouse is owned and controlled by the government of a country. It is a place where contraband or smuggled goods seized by the customs authority are kept until they are auctioned (sold).
3) Wholesale Warehouse: Wholesale warehouse is owned by the wholesaler to keep or store all the variety of goods bought. From the stored goods, retailers are assured of adequate and regular supply of goods. Wholesale warehouse are located near distribution or sales centres.
4) Public Warehouse: Public warehouse is owned and operated by private individuals who let it out to anybody for safekeeping of goods. They are usually located near seaports, airports etc. The person who hires a public warehouse pay rent to the owner for services rendered.
5) Manufacturers Warehouse: Manufacturers warehouse is owned by the producer of goods to store their products until they are demanded. Many producers have warehouses which are located in the factory to store goods produced. Some manufacturers have warehouses at regional distribution centres, e.g. Coca cola.
Factors to be Considered in siting a Warehouse
- Location of the Factory: One factor which must be taken into consideration is the proximity of a warehouse to the production ground, i.e ., factory.
- Nearness to the Market: A producer will consider the location of the market before siting his warehouse. He will normally prefer to locate it near the market.
- Nearness to the Distribution Centres: A warehouse has to be located near the distribution centres. Recently, Coca cola has introduced mini-warehouses (depots) at various sales points all over Lagos.
- Operating Cost: He must also consider the operating cost of the warehouse. It has to be located where the operating cost will not be too high.
- Cost of Building Warehouse: Before siting a warehouse, the cost of building or renting it has to be carefully considered.
- Transportation: The mode of transportation must be taken into consideration. The warehouse must be sited in a place that is accessible by road or rail.
- Consumers’ Buying Pattern: The pattern of consumption of consumers in an area must be taken into consideration since it is good to site a warehouse near the consumers.
Differences in function between the Wholesaler and Retailer in the Distribution of Commodities
- The wholesaler buys in large quantities from the manufacturer and sells in small quantities to the retailer.
- The wholesaler requires a large space (warehouse) to store his goods.
- The wholesaler stocks limited varieties of goods in his warehouse.
- The wholesaler acts as an intermediary between the retailer and the manufacturer.
- The wholesaler Interacts freely with the manufacturer.
- The wholesaler provides useful information about the goods to the manufacturer.
- The wholesaler spends more money on a particular product.
- The wholesaler may travel long distance to buy goods from the manufacturer.
- The wholesaler finances the manufacturer.
- The wholesaler grades, blends and repacks the goods.
- The retailer buys in quantities the wholesaler sells in bits to final consumers.
- The retailer requires a small space (shop) to display his wares.
- The retailer stocks several varieties of goods in his shop making it possible for consumers to make choices.
- The retailer acts as n intermediary between the wholesaler and the final consumers.
- The retailer relates freely with the final consumers.
- The retailer provides useful information to the wholesaler concerning market situations of his products.
- The retailer spends a lesser amount on a variety of products.
- The retailer mostly buys his good from the wholesaler within his vicinity.
- The retailer receives credit facilities from the wholesaler.
- The retailer does not grade, blend and repack his goods.